A Closer Look at Michael Burry’s Thoughts on the Banking Sector

As one of the protagonists in the film “The Big Short,” Michael Burry commands respect – particularly for fishing out circumstances that are about to go awry. To be fair, though, Burry isn’t a pure permabear and he basically confirmed that with his latest tweet. Implying optimism for banking sector stability, the famed investor doesn’t appear uneasy about the recent bank runs. Still, market participants should consider all angles before proceeding.

Early Wednesday morning, Burry had the following to say regarding the present calamity in the banking sector: “In October 1907, Knickerbocker Trust failed due to risky bets, sparking a panic. Two others soon failed, and it spread. When a run began on a healthy Trust, J.P. Morgan made a stand. 3 weeks later the Panic resolved & markets bottomed.”

To bring home the point, Burry concluded the social media post by declaring that “[a] stand was made this past weekend.”

For a quick recap, CNBC noted that “[m]ore than a century ago, the financial crisis known as the ‘Panic of 1907’ took place where there were numerous runs on banks, including Knickerbocker Trust. The crisis was over in just three weeks after J.P. Morgan, founder of the bank that bears his name, pooled money with other financiers to bail out the banking system.”

Providing another reaffirming message, Michael Burry, in a now-deleted tweet, remarked that “[t]his crisis could resolve very quickly. I am not seeing true danger here.”

Is he right? As with anything market-related, both supporting and contrasting arguments exist to the narrative.

Why Michael Burry Could Be Right About Banking Sector Optimism

To be sure, the U.S. government did make a stand as Michael Burry suggested. In a joint statement by the Treasury, Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC), regulators declared on March 12 the following:

Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.

Significantly, during the events that sparked the Panic of 1907, such immediacy did not materialize. According to Federal Reserve History, J.P. Morgan initially refused financial aid to Knickerbocker. However, when the suspension of the trust sparked a full-scale financial crisis in New York City, Morgan changed his mind and quickly released aid.

Under this historical context, the federal government’s almost-instant response to the crisis may have bolstered critical confidence in the banking sector. As well, Reuters reported that many analysts believe the Fed will be reluctant to hike interest rates next week. If that’s the case, a less-hawkish central bank may spark additional confidence toward banking sector stability.

Don’t Jump Headfirst Just Yet

Nevertheless, despite the clear intelligence that Burry brings to the table, it’s important to note that history doesn’t necessarily rhyme exactly. After all, we’re talking about something that happened in 1907. Just for context, back then, women did not have the right to vote. Thus, investors should be careful about extracting too many correlations from such an archaic period.

On a similar note, the AP noted that the Fed has been facing “stinging criticism” for missing what observers believe were clear signs that Silicon Valley Bank – one of the two major financial institutions that failed in recent days – was at high risk of collapsing. And that’s really the catalyst driving anxieties regarding banking sector stability.

One of the consequences of the Panic of 1907 was that it led to the creation of the Federal Reserve System. What would be the result of the current crisis? The creation of a Federal Federal Reserve, the lender of last resort to the lender of last resort?

The problem that investors recognize is that the banking sector is up the wazoo with regulations. Obviously, none of them averted the collapse of two major banks, thus sparking anger among market analysts.

Investors Aren’t Buying It (Yet)

Although opinions on this topic will surely rage over the next several weeks and months, what’s apparent is that so far, investors aren’t buying the optimistic angle yet. Major ETFs covering the banking sector suffered significant losses on Wednesday, steeper than that incurred by the major equity indices. Further, on a year-to-date basis, bank funds are down sharply while the S&P 500 posts a modest gain.

Notably, the U.S. government, while saving depositors’ funds, offered zero protection for the investors of the failed bank stocks. To be fair, common shareholders are typically the last in line to receive compensation (if anything remains) from liquidation proceedings when an underlying enterprise fails. However, the implosion of bank stocks occurred like a thief in the night.

Understandably, then, few people want to expose their money to the once-resilient financial sector. And that may have significant consequences down the line.

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